Handle capital gains carefully

October 23, 2016

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As you think about year-end tax planning, keep in mind that beginning in 2013, the top rate for long-term capital gains and qualified dividends was raised to 20 percent. If you are subject to the 3.8 percent surtax on net investment income, your effective top rate could be as high as 23.8 percent.

If you are in the 10 percent or 15 percent marginal tax bracket, the zero percent rate still applies.

Almost everything you own and use for personal or investment purposes is a capital asset. An example is an investment in stocks. When you sell a capital asset, the difference between the asset’s basis (usually its cost) and the amount you sell it for is a capital gain or a capital loss.

If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed as a deduction is generally the lesser of $3,000, or $1,500 if you are married filing separately. If your net capital loss is more that this limit, you can carry the loss forward to later years.

For tax purposes, it is usually advisable to hold capital assets for more than 12 months before disposing of them to avoid short-term capital gain status, unless market conditions indicate otherwise. However, if you are carrying capital losses forward from 2012, you may want to consider recognizing capital gains to the extent of the available carryover deduction.

In choosing which gains to recognize to offset capital losses for tax savings, preferably you should recognize short-term gains, if available, because otherwise they would be taxed at your ordinary income rate. Defer recognition of long-term gains in this situation since they are usually taxed at the lower long-term capital gains rate.

Carryover net capital losses from pre-2013 transactions are able to offset capital gains at the new higher rates without adjustment for the rate change.